578 B.R. 739
Bankr. M.D.N.C.2017Background
- Debtor Ronald Woody filed a Chapter 7 petition on April 12, 2017; Wells Fargo Advisors, LLC (WFA) filed a motion to dismiss under 11 U.S.C. § 707(a) on September 8, 2017.
- WFA holds four promissory notes (total claim ≈ $451,413; ~99% of Debtor’s scheduled unsecured debt) arising from paid employment “bonuses” that became due when Debtor left WFA.
- After termination, WFA demanded payment and commenced a FINRA arbitration; the arbitration was pending and stayed by the bankruptcy filing.
- Debtor continued paying other creditors (mortgages, credit cards), owned multiple properties and six vehicles, paid his children’s college tuition, and leased a new vehicle shortly before filing.
- Debtor deeded a previously solely titled rental property to himself and his spouse as tenants by the entirety after negotiations with WFA broke down.
- The bankruptcy court found Debtor filed solely to avoid the WFA arbitration, failed to make payments to WFA, retained an expansive lifestyle, had the means to pay, and made transfers that shielded assets — and thus granted WFA’s motion to dismiss for lack of good faith under § 707(a).
Issues
| Issue | WFA’s Argument | Debtor’s Argument | Held |
|---|---|---|---|
| Whether the Chapter 7 case should be dismissed for cause under 11 U.S.C. § 707(a) (lack of good faith) | Debtor filed solely to discharge WFA and avoid arbitration; his conduct shows bad faith and misuse of Chapter 7 | Debtor filed to avoid costly arbitration and disputes liability to WFA based on fraudulent inducement; his principal purpose was to stop arbitration costs | Court granted dismissal for cause under § 707(a) — petition filed in bad faith |
| Whether Debtor singled out WFA as the primary creditor (reducing creditors to a single creditor) | WFA: its claim is ~99% of Debtor’s unsecured debt; Debtor continued paying other creditors while making no payments to WFA | Debtor: denied manipulating creditors or consolidating debts to single out WFA | Court found Debtor did single out WFA; factor weighs heavily in favor of dismissal |
| Whether Debtor failed to make lifestyle adjustments and had sufficient resources to pay debts | WFA: Debtor maintained expansive expenses (multiple properties, vehicles, tuition), has income to pay; preserving lifestyle is inequitable | Debtor: high expenses reflect lifestyle but dismissal should be reserved for egregious cases; disputes characterization | Court found Debtor retained an expansive lifestyle, had ability to pay, and these factors weigh heavily for dismissal |
| Whether transfers and timing (transfer to tenancy by the entirety; filing in response to pending arbitration) indicate bad faith | WFA: Debtor transferred a property to tenancy by the entirety after negotiations, shielding it from WFA; filing was in direct response to arbitration | Debtor: contends transfer was for estate planning and denies improper motive for filing | Court found the transfer had the effect of shielding assets and the petition was filed in response to pending arbitration; these factors support dismissal |
Key Cases Cited
- Indus. Ins. Servs., Inc. v. Zick, 931 F.2d 1124 (6th Cir. 1991) (approving a totality-of-circumstances “smell test” for bad-faith dismissal)
- Perlin v. Hitachi Capital Am. Corp., 497 F.3d 364 (3d Cir. 2007) (cautioning § 707(a) dismissal be reserved for egregious cases but allowing consideration of income and expenses)
- McDow v. Smith, 295 B.R. 69 (E.D. Va. 2003) (bad-faith filing includes transfers to place assets beyond creditor reach and misuse of Code)
- In re Marino, 388 B.R. 679 (Bankr. E.D.N.C. 2008) (adopting multi-factor totality-of-circumstances test for § 707(a))
- In re Griffieth, 209 B.R. 823 (Bankr. N.D.N.Y. 1996) (single-creditor predominance can indicate motive to single out a creditor and justify dismissal)